Bill Gross: QE To Continue To At Least End Of Year

PIMCO's Bill Gross told Bloomberg Television's Trish Regan and Adam Johnson
on "Street Smart" yesterday that quantitative easing will continue to "at least
the end of the year."

Gross said that the Federal Reserve knows that its policy has negatives: "There
are ultimately and presently negatives to these policies. The chairman recognizes
that." He also spoke about returning to the gold standard, which would be "very
difficult."

On whether he enjoys Twitter, Gross said, "I take my cup of coffee, one or
two cups, and get my brain working, and then something comes to mind that listeners
might take advantage of or be respectful of. Do I tweet what is exactly on
my mind? In some cases because of the 140 letter limit, it's hard to get across
the message. But yes, I enjoy tweeting."

Courtesy of Bloomberg Television

Gross on whether this is the end of quantitative easing as we know it:

"Not yet. As my tweet indicated, I think it's growth dependent and what type
of growth would be necessary to and quantitative easing? Probably something
like 3 to 3.5% for a number of quarters and probably something approaching
7%, given the 6.5% unemployment rate. We don't think we are there yet. Obviously
yesterday the minutes raised the possibility. There is dissension amongst the
participants, the governors, so to speak, but the three primary musketeers,
the three musketeers, we call them -- Bernanke, Yellen and Dudley -- are in
firm command and we don't think anything is going to happen for at least 10
months."

On whether 3.5% growth will happen in the near future:

"It would feel like it is coming if we did not have fiscal austerity and the
pullback in terms of government spending or the potential pullback. Housing
and other house related industries are pulling the economy forward, but only
probably only at a 2% pace. The Fed has indicated--not for the purposes of
quantitative easing specifically--but in terms of their policy rate, raising
that 25 basis point policy rate, that they would need at least 6.5% unemployment
and perhaps 2.5% or higher inflation for one to two years. We're close to those
so quantitative easing, in terms of a trillion dollar package, $85 billion
monthly package of treasuries and mortgages, we think it continues until at
least the end of the year."

On how to get out of the quantitative easing scenario that we've been in
for so long:

"That's very difficult, not just for the Fed, but other for other central
banks. at the moment, the bank of japan is about to enter the pool, so to speak,
the deep end. The Bank of England as well, perhaps, with carney indicating
as much. Is it easy to get out of the deep end once you get into it? It gets
difficult, because the market begins expects a constant infusion of liquidity--$85
billion a month into the bond market, which extends out into high-yield and
equity credit as we move forward. Once you cut off the check writing and the
purse strings, it becomes a problematic question in terms of valuation and
the ability of markets, stocks, and bonds to continue on."

On his tweet on 2/20 saying that bond vigilantes are no more and central
bankers are the masters of the universe:

"They are trying to let us know that they are vigilant. We saw the minutes
yesterday and they were extensive and they meet every other month or more frequently.
Are they vigilant? They are in terms of their objectives. what the fed is trying
to do is reflate the economy, that means not only produce 2 to 3 to 4% real
growth, but a modicum of inflation in combination such so we have a nominal
5% of GDP environment. Are they vigilant in terms of moving towards that goal?
Yes. Will they be vigilant in terms of having reached it then pulling back
and not disrupting markets? Perhaps not. We'll have to see going forward."

On whether central bankers have been irresponsible:

"I would say this and Bernanke said it as well, that there are negative aspects
to these policies. The negative aspects come in various forms, potentially
with narrow credit spreads and higher risk in terms of asset prices. They come
in terms of market making and liquidity aspects of the market itself, they
come, as I have indicated and PIMCO has tried to advance in terms of an argument
that low interest rates are a negative influence in terms of savings and therefore
eventual investments. There are ultimately and presently negatives to these
policies. The chairman recognizes that but what he does recognize going forward
is if he can reflate the economy successfully, most of those troubles will
go away. We remain able bit skeptical,, but we're just going to have to see."

On why he tweets:

"It doesn't take very long. I take my cup of coffee, one or two cups, and
get my brain working, and then something comes to mind that listeners might
take advantage of or be respectful of. Do I tweet what is exactly on my mind?
In some cases because of the 140 letter limit, it's hard to get across the
message. But yes, I enjoy tweeting."

On writing that each additional dollar of credit seems to create less and
less heat:

"Credit has been expanding for a long time, certainly since 1971 when Nixon
abandoned the gold standard. During that period of time, credit, which includes
corporate bonds and household debt, etc., has expanded from $3 trillion to
$56 trillion over that period of time. Less and less bang for that $56 trillion?
Certainly, because during that process credit spreads have narrowed and interest
rates have come down. The process of real growth generation from credit expansion
is almost necessarily come down as well. It is the same thing as saying that
corporations are less willing to invest in a real economy that returns lower
and lower rates of return than they were back in the 70's, in which credit
was less available. As spreads compress and interest rates come down, you almost
necessarily have a credit market that is less effective."

On whether we should be concerned about this:

"I think we should. At some point, the ability of capitalism to expand on
the basis of credit expansion is limited. Certainly capitalism is correlated
specifically to productivity and growth in the labor force. That combination
depends upon credit and successful productivity of credit itself in terms of
its expansion and ability to fertilize in terms of real growth. Going forward,
we should be concerned about that. Robert Gordon and others suggesting that
all of the low hanging fruit has been picked--in this case in terms of credit.
much of the gain from credit expansion has already been realized. We have got
to look for other avenues in terms of real growth going forward."

On the so-called currency wars:

"We don't necessarily think it is a war in terms of firing bullets across
borders. Each country is operating for its own benefit. It happened in the
1930s in terms of competitive devaluations. They did not call it currency wars
back then. These days, the currency wars are basically fought with quantitative
easing and check writing and lower and lower policy rates. Is it a war? Perhaps
there is competition between countries in terms of this race to the bottom,
this willingness or proclivity to lower their currency so that their exports
and real growth will be higher than other particular countries. There is nothing
wrong with that. The question you ask, is a dangerous? It is, relative to inflation.
Each country--the bank of the japan, the UK, the US--to the extent that they
are all writing checks, basically what they're doing is inflating and trying
to reflate their economies. That is a danger for the bond market to the extent
that inflation moves from 2% to 3% over the next few years. It's a danger of
fixed income investments relative to real assets to gold and depreciation of
the currency itself."

On whether a gold standard could be enacted:

"There are those on the right or left extremes that suggest that we should
have some type of rock or foundation in terms of our ability and banks' ability
to generate credit. I think that probably is true. But whether or not the country
or the global economy can move back to a gold standard, per se, that would
be very difficult. What central banks need to do is to maintain a semblance
of conservative check writing. A trillion dollars a year in terms of quantitative
easing, that to me and to the market is not conservative. It helps to elevate
asset prices and to lower interest rates, but in the long run it is basically
inflationary in terms of its momentum. So gold standard? Let's think about
a central bank standard--about central banks becoming vigilantes again and
then we will talk about gold at some future date."